The AAA Storage Podcast

Welcome to the AAA storage podcast,
your integrated real estate and

development partner, exploring all
things, self storage investing to

bring you diversified success.

Let's dive in.

Brandon Giella: Hello and welcome back to
another episode of the AAA Storage podcast

I have with me as always, Paul Bennett.

Thank you for being here.

How you doing, Paul?

Paul Bennett: I am good.

Good to see you, Brandon.

Brandon Giella: Good, good to see you.

Well, today we are recording on
Friday, the 13th of June, and I

mentioned that because, uh, it's
about 11 o'clock central, 12 Eastern,

and I mentioned that because.

We had, some breaking news over the
night, which was that Israel and Iran are,

entering into some kind of conflict where
Israel launched some attacks, about 24, 48

hours ago on, three Iranian nuclear sites.

And there was a general of the,
Iranian guard that was killed.

Yeah, and several other scientists
were killed in their nuclear program.

The contention was, Israel's argument is
that, Iranian officials and their military

are enriching uranium to have weapons
grade nuclear missiles, that they're

actually constructing them now and.

In retaliation to that attack, Iran has
launched, over a hundred drones that

have struck some, Israeli sites and that
their Iron Dome system has intercepted.

A majority of them claims Israel so.

I say all that to say that that has an
impact on markets, as does any major

geopolitical conflict, but especially
one of this kind of magnitude.

And so, Paul, you had some thoughts
on how this might impact real estate.

Now granted, these are very large, complex
issues with arguments on many different

sides and different ways to analyze
and understand conflicts like this.

But these kind of political, conflicts
do impact markets do impact real estate.

And so there's a way of thinking about
them and understanding them so that we

can interpret what's going on around
the world to make better decisions.

and this is of course not to.

Neglect or downplay loss of life
and difficulty and challenges that

people are facing around the world.

But it's important to understand so that
we can, be better stewards of our capital.

So with that long introduction,
Paul, I'd love to hear your thoughts

on what's going on and how you're
interpreting this as an expert

investor, in the real estate sector.

Paul Bennett: Yeah, Brandon, thanks.

Um, yeah, it's a, it's,
it's not a great day.

Um, yeah, I don't think
war's ever a good thing.

We're gonna cut a wide path around
the political aspects of that 'cause,

my opinion, your opinion on the
political aspects that probably don't

matter, to people that are listening.

But I woke up early this morning.

I generally get up early.

I got up about four this morning, and
that's the time of day where I usually

look at sort of the macro level news
And do some research at the macro level.

'cause during my day there's not a
lot of time for that 'cause it's so

indirect to what we do every day.

early this morning I saw that news and
I began to think about, the potential

impacts to our business, our investors.

Um, and it, it led to this conversation.

I, I I think it's really interesting.

By the time this is edited and out in the
marketplace, it will either hopefully have

some value or it'll be totally irrelevant
because the conflict will already be over.

so it is a little bit of
a roll of the dice, right?

But, you know, the ultimate
impact that this is gonna have and

any conflict like this is gonna
have, this one is especially.

important because it's in the Middle East.

and there, there's some different
aspects to the conflicts in the

Middle East in terms of how it affects
our economy and things here in the

us, but its ultimate impact will
absolutely, be dependent upon the scale

and the duration of this conflict.

So, if it's over in, 24 to 48 hours,
then, none of this will really apply,

I think it's important to look at
probably four or five areas where

you can expect to see some impact
if this conflict stretches out.

I read, early this morning
that Israel made it very clear

they weren't finished yet.

so I'm sure Iran won't be finished
in terms of their responses either.

it looks like this will be at least a.

Short to intermediate term conflict
if that is the case, if it's not a 48

hour event, I think the first thing you
can expect is some market volatility.

We're already seeing that.

when I looked early this morning
at mid-morning, the market

was down about 500 points.

and that's just risk off selling.

That's people, because of the level
of uncertainty this conflict brings,

they simply wanna be on the sidelines.

and I think you can expect to see
that same behavior in the real

estate markets if this stretches

out for any length of time.

The uncertainty that it creates on lots of
levels, we'll have people go to sidelines.

And I think you'll see a
decline in the investment.

Activity.

if it goes on for any duration, I would
expect to see cap rates expand, in

most segments of the real estate industry.

Not dramatically, but again, the
uncertainty creates risk and cap

rates are at some level tied to risk.

They're basically a reflection of
the likelihood of the continuance

of the existing cash flows.

and so I think you could
see some cap rate expansion.

and lastly, under sort of the volatility
category, I think you, I would expect,

although it's, it is interesting.

I read some information that
kind of could go either way.

There's at least a possibility
you'll see less foreign investment,

in real estate in the US and
that's a pretty significant

source of capital in some sectors.

or at least delays in deals.

I think there's also an argument
that the US is a fairly, you know,

it is sort of a bellwether economy
on the planet, and you actually

could see more inflows of capital.

because this is sort of a safe haven.

whichever way that goes, I think
in the beginning you'll see a

delay in some transactions and some
investments until there's a little

more certainty how long this is gonna
last and what direction it's gonna go.

the next thing, because it's in
the Middle East and it's already

happened, futures in the oil.

world have already gone up pretty

dramatically.

I think we can expect that if this
goes on for any length of time,

you'll see a surge in oil prices.

and that's gonna be related to inflation.

So it sort of has a dual impact, right?

it's gonna affect
transportation and utilities.

it's gonna affect, the fuel side
of that equation is gonna affect,

supply chains and operating costs.

And so I think for the real estate.

Industry, what you can expect is
particularly to see retail and,

industrial real estate affected, because
the tenants in those sectors may see

margin squeeze because of increased

cost related to fuel prices.

and then the other impact is inflation,
which could, either delay rate, cuts,

sort of the higher for longer, scenario
that has been talked about off and on,

and could even result in increase in
rates depending on how severe it is,

how long it lasts, that kind of thing.

and so that is the next category, right?

is interest rates.

I think the uncertainty that this
creates will Pause any potential cuts

in rates, and, and could result in
that higher for longer, scenario.

And in real estate, debt costs
are, a pretty significant.

factor.

I'll talk about each sector individually
in just a minute, but I think it will

make refinances more difficult 'cause
higher interest rates with the bank's

focus on cashflow coverages are gonna
make it more difficult to refinance

loans, which I think particularly first
and foremost in the office sector.

And secondly, potentially some existing
multi-family deals could cause some real.

Distress, and issues.

I, I'm not saying any of this is gonna
happen, Brandon, but I think these are all

Brandon Giella: Yeah, of

Paul Bennett: you sort of need to
be thinking about and considering,

as you look at real estate.

I think the other thing that inflation
will do is result in, expanded cap rates.

cap rates are a yield related metric.

the uncertainty will cause them to
expand, but also just the yield basis.

we'll also probably, drive a little
bit expansion in, in cap rates and

therefore some lower valuations.

Again, this could be very short
term and if it is very short

term, you won't see a lot of that.

but if it lingers for a while or
if this conflict goes on, like the

conflict in the Ukraine has, like the
conflict in Gaza has and stretches out

to months and then even possibly years.

You know, sort of a slow grind.

I think all these things, you know,
at some level become possibility.

Brandon Giella: Okay, help me.

I wanna try to recap.

Everything you just said, 'cause you're
40 years of investing, you're, you're

running through this really quick, so
I wanna summarize it in just a second.

But first, why do you, why
are you arguing that interest

rates, they may pause the cuts.

What, what's the connection there?

Paul Bennett: Well, first of all,
I'm not arguing for any of this.

Brandon Giella: No.

Yes.

Paul Bennett: I'm simply sort of
trying to look at this and say, what

are the potential impacts if this

conflict drags on for any length of time?

I think that because this conflict is in
the Middle East, because it may affect

oil prices directly, because, it may
have some of the impacts I've talked

about, I think it's likely that it could
result in some incremental inflation.

Brandon Giella: Okay.

Paul Bennett: has been very focused

on inflation related to

any rate cuts.

So I think that's probably the
biggest driver of that possibility.

Brandon Giella: So if I'm hearing you
right, I'm not gonna capture all of

it, but if I understand what you're
saying, conflicts like this create,

first of all, negative sentiment.

You get a risk off kind of, narrative
that goes through the market mindset.

And then there's also, impacts to
oil, which is a major driver for

a lot of real estate, whether it's
developers or, different, factors,

supply chain, things like that.

And then that, increases, potential
for inflation, which then, will.

Extend the delay, for the Fed
to cut rates in the future.

And so, but it all depends
on how long this conflict is

Paul Bennett: Yeah,

and there's one other factor I referenced
I didn't really talk about, but that's

foreign capital, particularly in

the Gateway Cities.

If you look at Miami, New York, LA.

those are markets where foreign
investors or San Francisco, huge

foreign component in terms of
foreign capital in San Francisco.

cities like that are probably the
ones that are most likely to be.

Impacted and the absence of foreign
capital, sort of in a risk off mindset,

could cause a slowdown in those markets.

But there's also the possibility
of the opposite effect.

I can't really argue
either side very well,

but could be if they're seen
as safe havens, you could see

more inflows of foreign capital.

But,

um, again, it office seems to, can't
catch a break, um, because I would.

A lot of the foreign capital that
comes into the us it, it goes into

all sectors, but office is one of
the ones historically that have been

sort of particularly, you know, like
office buildings in New York or LA have

been the darlings of foreign capital.

And it, you know, it's already sort of
wobbly and, and, and fallen to its knees.

And the absence of that foreign
capital could be, you know,

another negative aspect for.

Brandon Giella: Yeah.

Paul Bennett: for, uh, for
certain types of real estate.

Anyway, so I

think you should expect
increase volatility in pricing.

if this lasts any length of time
and rates creep up or hold here for

longer, I think there'll be some
difficulty in refinancing and financing.

I think there'll be a reduction
in transaction volume until

there's more certainty.

and I think there'll be sector specific.

weaknesses.

if you want to, we'll
talk about that next.

'cause I kinda

looked at each sector and thought
about what are the potential

impacts in those particular sectors.

as I looked at the market.

Brandon Giella: Last episode we
talked about a lot of, the different

sectors and how you, you're seeing
kind of this mid-year outlook.

So I'd love to hear
kind of that same order.

what are.

The different sectors, how
you're interpreting and what they

may experience in the future.

Paul Bennett: Yeah, let's
go from worst to best

Brandon Giella: Okay.

Paul Bennett: Let's start with office.

if this conflict is protracted.

I think you have several negative
impacts on the office market.

that will just make things more
difficult than they already are.

overall this event, if it lasts any length
of time is negative for the office sector.

It's already struggling.

if you see higher.

Debt cost, it's gonna make
it, much more difficult.

if you remember, we talked about the
fact there are, hundreds of millions

of dollars worth of loans that are
due to be refinanced this year.

If interest rates move up at all
or don't move down, it's gonna make

those refinancings more difficult,
which is gonna result in defaults.

the market's already dislocated
and none of this is gonna help it,

and the lack of foreign capital in
certain markets could also hurt.

So office, I would definitely
say this is a negative impact.

retail, although not necessarily the
grocery anchored retail, we talked a lot

about, um, in a, in a show we did not
that long ago, but retail in general could

see some struggles on the tenant side
because of negative consumer sentiment.

If this protracts, if inflation goes up,
if rates hang here or go a little bit

higher, the US consumer could put his
hands in his pocket and keep 'em there

for a little bit, and that's never good.

If you're in the retail space,
industrial, I think it's mixed.

I don't expect huge negative
impacts, but I do think there could

be some supply chain disruption and
some increased cost for industrial

tenants related to, oil prices.

and stress on tenants ultimately
results in stress on landlords, right?

tenants can't pay the lease or
if they're struggling and either

downsizing or not growing, then that.

Ripples into the landlord
side of the equation.

multifamily.

I think the impact is pretty mild.

I really think

multifamily is relatively the, the
higher debt cost won't help new

development, but less due development
won't hurt multifamily, as a sector

really, because it's coming out
of an overbuilt state right now.

I think you may see rent growth
slow a little bit if inflation

ticks up and, consumers, Disposable
funds, become a little tighter.

But overall, I think the
impact is fairly mild.

and then the last two categories, I
talked about industrial in general.

We can talk about the small bay
industrial that we developed.

'cause I've looked specifically at that
because, you know, we, we have, you

know, pretty big vested interests here.

I think the impact is mixed.

I think a lot of the tenants, our
tenants in the small bay world, are, are.

More consumer facing businesses.

So to the extent consumer,
consumer sentiment, ticks a

little more negative, that's not
gonna be helpful for the tenants.

fuel prices, you know, the last
mile logistics folks and, and

landscapers and HVAC contractors and
all those types of people that you

find in, in small bay industrial.

their businesses are impacted
by higher fuel costs.

so there could be some.

Some drag on the tenant side of the
equation in small Bay Industrial, but

I think the impact overall is mild.

I did even more digging, to
get sort of people's views.

Again, not specifically on Iran and Israel
because although the drum beats been

happening for the last few weeks, nobody's
really looked at that specific event.

But looking at events like
this, particularly ones

that impact the Middle East.

Brandon Giella: Hmm.

Paul Bennett: there's a little more
data and a little more information

out there and self-storage.

you know, and this sounds self-serving.

I've said that before, when
we talk, but the reality is

self-storage is so resilient

that it tends to outperform.

All the other segments in
an environment like this.

I really don't see anything
that raises real red flags.

I think there's a mixed bag.

I think there's some aspects of this
that'll be negative for self storage.

I think there's some that are neutral
and even one or two that are positive.

So I think on

the whole, if you look across all
sectors, multifamily and self storage

probably sit in the best seat.

this environment, if this
conflict gets protracted.

I will say both those sectors
are sort of climbing out.

We've talked about the bottoming
process and that they're sort of at

a critical point of transition, and
it could, that bottom could get flat

for a little while, it may not be a
u-shape bottom that may be more of a.

Box, shape bottom, where the recovery
has slowed a little bit because

of some uncertainty in the market.

transaction volumes, would probably drop
valuations may not be quite as attractive

as they might have been otherwise.

And rent growth may slow a little bit.

So none of

that's positive, but I don't see
any significant negative impacts

to multifamily and self storage.

and really.

industrial retail and
small bay industrial.

The impacts are all mild.

It's the problem child office,
that's in a really vulnerable state.

And if this gets extended and rates do go
up, I think you could see the defaults in

the office market increase significantly
and there are already pretty significant.

Brandon Giella: thanks for that.

that's helpful.

'cause it's, you know, real estate in
general, markets in general, but then

when you kind of slice 'em up and get
more fine tuned, there's definitely a

lot of factors that are going into it.

just what's gonna happen.

But not that we know what's gonna
happen, we cannot predict the future.

But I am curious, what would
you say, let's say for the next.

Seven to 10 days or the next couple of
weeks, what should investors be watching?

Is it that they should, take a
look at the length or escalation

of conflicts like this?

Or are there particular sectors, within
equity markets or commodity markets

or, things that they could read in
the news that would help them kind of

give a sense of what may be coming in
the future or how you interpret it?

Paul Bennett: first of all, I think
the length of the conflict and

the severity, the intensity of the

Brandon Giella: Yeah.

Paul Bennett: is the,
probably the biggest thing.

Hopefully this is over in seven to 10
days, and this podcast will gather.

Mothballs somewhere, you know?

'cause

nobody wants to look at it.

but I think the duration and the
severity, is a key aspect, I think.

How many players get drawn into this?

I think the impact on oil right now,
the short term impact we've seen in the

futures market is sort of short term
and somewhat opportunistic perhaps.

By the traders.

Iran is a major source of oil, there's
no doubt about that, but, if Iran is

the only disruption, it won't have
a longer term impact on oil prices.

If this becomes a wider conflict in
the Middle East, it could have a more.

serious longer term impact on oil
prices, which then drive inflation

and all the things we talked

about.

so I would watch the futures
market a little bit after you get

outta the first few days of this.

the reactive part of the market
will have worked its way out.

looking at longer term contracts in
the oil futures market will give you

a real idea where the professionals
think oil prices are going.

to me that would be something
that I would definitely watch.

I think those are probably the
two biggest things and the wider

the conflict, the more people that
get involved and hopefully there

won't be anybody else involved.

And this will get resolved quickly.

if Europe gets involved that
the US gets involved in any way.

if other countries in the
Middle East get involved, then.

You know, with conflicts already,
the Gaza situation in the Middle

East and the Ukraine conflict, which
doesn't seem to be able to find

a resolution, at least not yet.

it's a pretty unstable environment,
geopolitically, and it could have,

some broader impacts down the road.

Brandon Giella: yeah, for sure.

I know, the US earlier this week, it was
four or five days ago, they, evacuated

the US embassies in parts of the region.

So, you know, maybe they
were expecting something and,

Paul Bennett: I think they had a
pretty good, I mean, everything I've

read, and again, we're not gonna
touch the political side of this, but

everything I've read is the US
was discouraged in Israel from

doing what they did last night.

I.

But probably my guess would be
had some idea it was coming.

And so that's why you heard some
warnings, you know, from our government

and you saw them pull our embassy folks
out, the non-essential people out.

I think they had a sense this was
coming, and you know, it could get

real interesting in a negative way, if.

Part of what happens here is the US gets
blamed for this, even though I don't

think we were involved again, I have no

idea.

but you see some retaliation, whether
it's domestic terrorist attacks or

in Europe or in the us That's a whole
different destabilizing sort of series

of events that starts to create more
uncertainty and highlights all the

things we've already talked about.

Let's hope that doesn't

happen, but,

Brandon Giella: Yeah.

Yeah.

Great.

So just to give an update, I'm
looking at, markets right now.

it is currently 1133 central on
Friday, and the s and p is down 0.4%

and the Dow Jones is down just over 1%.

but it looks like things
are trending a bit back up.

from where they were about nine
30 central this morning, the

s and p bottomed out about.

59 93 and it's back up to just over 6,000.

So we'll keep watching.

but Paul, is there anything else
that you would advise, folks

to listen to or think about?

Paul Bennett: Uh, well, I, I,
I guess I wanna make a comment,

Brandon, 'cause I don't want, um, our

conversation to be sort
of taken in the wrong way.

I don't think any of this shakes
my confidence in or willingness to

invest in commercial real estate.

it's simply one of those contextual
events that you have to consider

in our world as a developer.

I've said this multiple times,
where the economic environment

goes over an intermediate.

Timeframe from three to six
years is really what affects us.

what happens in the next, 90
days really doesn't, because the

properties we're building, aren't,
directly affected in the short term,

it's four year lease up in storage
and, you know, six months to a year in.

In the small bay industrial products.

So I am not negative.

I'm not saying run from real estate.

This is not a good time to invest.

I just think you have to have these
contextual backdrops as part of your

overall decision making process.

And it, it may I.

Um, cause one to pause

and sort of, you know, we're less
than 24 hours into this, right?

We'll know a whole lot more in
24 more hours, and, and a whole

lot more in five days to a week.

and so, you know, I, I would, I would
probably take that into consideration

in terms of making decisions.

but on the whole, I, I don't think this
is a super negative event for commercial

real estate in the United States.

but it's just, it's, it, it, it's
one of those things you deal with.

And and this is the third time,
in the last three years, we've

had a conflict like this break out
that, you know, has some level of

implication for the economy in the us.

So.

Brandon Giella: Yeah.

It's important to, always analyze
what's going on in the world.

'cause it always, you know,
markets and geopolitics and.

Cultural issues are all intertwined.

but what I would encourage listeners to
is listen to the previous episode, episode

15, where we look at a midyear outlook and
run through those real estate sectors and

give kind of a general overview of what
we're seeing in markets, compared to this

episode and what we're seeing here because
they all relate, but it is helpful to see,

I guess you could say like a multifaceted.

Analysis of how things like this
are impacting the fundamentals.

'cause we went through the fundamentals
last episode, this episode, there's

some, you know, just things are changing.

So, I would also love to hear from
listeners or, or, folks watching

or even on, on social media.

You know, find Paul, find the
AAA team, find Andrew fro wine.

email Andrew dot froe@aaastorage.com.

F-R-O-W-I-N-E.

I would love to hear from folks,
how are you guys interpreting, some

of this news or, different things
that might be helpful for, your own

analysis when you're thinking about it.

but it also underscores a point, trust
a very good sponsor like AAA that

is reviewing these things in real
time so that they can make the best

decisions possible and give you guys
the best, thoughts and interpretations

of the market, that are available.

So.

Anyway, Paul, thank you,
for looking at all this.

I know you were up early looking
at all this for us to get

some real time news analysis.

and so we'll try to get this podcast
out as soon as possible and yeah,

hopefully encourage conversations, but
also just more analysis on what's gonna

be happening over the next few days.

so we'll keep you updated.

Paul Bennett: Yep.

And, thanks Brandon.

It's always fun to get together and
again, I wanna make sure people know

I'm, I'm really not being negative.

It's just in the US we tend
to live in a bubble, right?

We, we, we are so

insulated from the rest of the world.

If you spend any time in Europe,
you know, in Europe going from one

country to another's, like going from
North Carolina to South Carolina, and

they're, they're much more exposed
to what's going on in the world.

Sometimes we tend to, not.

Not think about it as much.

And so this is just a contextual piece.

I don't think it's bad news in, in
fact, I think there's a very low

probability that it has anything
other than a short term impact.

And a few deals

get delayed.

'cause people kinda wait to see what's
gonna happen over the next couple weeks.

I don't think there's gonna be huge
impacts, but all the things we've

talked about are possibilities.

And so I think they just have to be
factored into your whole thought process.

Brandon Giella: Yep.

that's right.

Yes.

Cannot predict the future.

but it's helpful to think through.

So, Paul, thank you.

like I said, we will try to get this
out, as soon as possible so folks

can take a listen and, respond and
keep the conversation going on how

everyone's interpreting what's going on.

But I know you'll be keeping an eye on it.

And, we'll be back at you next week.

Paul Bennett: you got it.

Thanks, Brian.

Brandon Giella: All right.

See you then.

Paul Bennett: Take care.